Affordable Housing Advocates Support Harmon Rent Control Challenge, Part 1


January 25, 2012 
Even dropped from the Empire State Building, it can’t kill anyone
Even dropped from the Empire State Building, it can’t kill anyone
Though ’tis a consummation devoutly to be wished, I had given up believing that rent control would ever be ruled an economic taking without due process or just compensation (even though it is both), because the procedural and administrative defenses mounted by a determined confiscatory local government are so tortuous to besiege and scale that for nearly forty years no one has. 
Destined to have his name in the law books? James Harmon


Destined to have his name in the law books? James Harmon

Now there’s a plaintiff, James Harmon, who’s within hailing distance of the Supreme Court, and if the Supreme Court takes up the case, this could be bigger than Kelo v. New London, the landmark decision in eminent domain, whose prosecution and judgment tracked the rise in housing prices, and whose 2005 decision (which affirmed its Constitutionality) triggered a massive blowback that coincided with the market’s top, and the beginning of our long, long fall in housing prices. 

Wonder of wonders, even the New York Times’s (December 19, 2011) article profiling him declines to demonize; indeed, it starts sympathetically.

James D. Harmon Jr. learned the value of a house as a child, shoveling coal into the furnace of one of two Upper West Side buildings owned by his grandfather, a French immigrant who worked as a waiter. “Jimmy, you take care of your building and your building will take care of you,” his grandfather told him.

Being a landlord is a job; property residual value is not merely luck or inflation, but he residue of diligent stewardship.

“But the word he used in French wasn’t building,” Mr. Harmon recalled the other day. “The word he used in French was ‘maison,’ which means home.”

As I’ve previously posted, you are what you live in, and what the Messrs. Harmon handed down, father to son to grandson, was a respect for property rights.

Now Mr. Harmon, 68, who grew up in one of those buildings — a bow-fronted town house on West 76th Street near Central Park — has gone to the United States Supreme Court contending that New York City’s rent laws constitute a taking of his property without just compensation, a violation of his constitutional rights.

Those of us in the real estate business have known this for decades, yet now is the first time we have a fair shot at actually hearing the case heard.

The regulations are meant to support the government’s goal of maintaining affordable housing for its citizens.

‘Meant to support’ is probably a fair summary of the policy logic behind rent control, but as law professorRichard A. Epstein notes in a Wall Street Journal op-ed, those goals are basically never achieved:

All versions of rent-control laws share a single dominant characteristic: They allow a tenant to remain in possession of property after the expiration of a lease at below-market rents.

Back when Cambridge had rent control, my pro-rent-control friends used to argue vehemently that the bargain element was not an intended outcome, just a side-effect of its anti-gouging provisions. Yet rent control has so many pro-tenant and anti-landlord biases built into its structure and administration that invariably it becomes a rent bargain, a progressively greater rent bargain:

New York even gives the tenant a statutory right to pass on the right to occupy the premises at a controlled rent to family members who have lived with them for two or more years. The tenants in Mr. Harmon’s complaint pay rent equal to about 60% of market value.

Cato’s description of its amicus brief urging the Supreme Court to take up certiorari is even more blunt:

Rent control is literally a textbook example of bad economic policy.

Economics textbooks often use it as an example of how price ceilings create shortages, poor quality goods, and under-the-table dealings. A 1992 survey revealed that 93% of economists believe that rent control laws reduce both the quality and quantity of housing.

That level of agreement among usually contentious dentists is akin to a moral certainty, one which Mr. Harmon certainly shares:

Instead, he says, the laws have forced him and his family:

1. To shoulder the government’s burden.

2. To extend what is essentially “privatized welfare” to rent-stabilized tenants who are paying rent 59% belowmarket rates and who have rights of succession to their lodgings in his house.

While the second claim is the more striking figure, as the late great Max Kargman taught me, when we weresuing the Federal government over the Constitutionality of ELIHPA, it’s the first of these two challenges that should have the most traction. 

For whatever set of reasons, previous Supreme Courts have given localities wide discretion to establish ‘temporary, emergency’ rights to intervene in private contractual bargains, and the principle of stare decisis(Latin for “to stand by what is decided”) makes it hard for one Supreme Court simply to reverse a previous Supreme Court. Cato again:

In their lawsuit, however, the Harmons face many unfriendly precedents that have given states free reign to regulate property, to the point that it is occupied on an essentially permanent basis while surviving Fifth Amendment scrutiny.

When the pressure is enough, however, the Court can often find a way, as Brown v. Board of Educationeffectively overturned Plessy v. Ferguson. 

One way to challenge some laws is to argue they are so arbitrary and poorly justified that they violate the Fourteenth Amendment’s Due Process Clause. Because this is an especially difficult type of challenge to bring, Cato joined the Pacific Legal Foundation and the Small Property Owners of San Francisco Institute on a brief supporting the Harmons’ request that the Supreme Court review lower-court rulings against them.

As we’ve previously seen in San Francisco, the right of adverse possession gained by rent control can be so extreme as to constitute a permanent judicial squat – and as we saw in Cairo, it can lead to physical seizure of the property, to the point where the tenant is building or demolishing walls and the landlord is helpless.

Following the Supreme Court decision in Yee v. City of Escondido (1993), the court insisted that “government regulation of the rental relationship does not constitute a physical taking.” 

Yee v. Escondido involved San Diego’s ordinance regulating the rent of mobile home pads, and was essentially a homeowner-protection law, mobile homes actually being immobile and in my view the Court overreached in its finding – but there it is, stare decisis, and if the Court is going to overturn rent control, then the plaintiffs need a new avenue, such as the government’s self-interest: making them pay for a benefit that society as a whole should fund. Moreover, the policy if self-defeating, heroin for urban neighborhoods. As Cato puts it:

As expected, therefore, New York City’s Rent Stabilization Law — the most (in)famous in the country — has led to precisely these effects:

Housing is scarce [The same is true in rent c0ntrol domains Cairo and Mumbai. – Ed.]

Apartment buildings are dilapidated because owners can’t charge enough to fix them

Housing costs have only increased (in part because costs are transferred to non-rent mechanisms such as “non-refundable deposits”).

This last point is a classic example of the Law of Economic Pressure. When the cost of occupancy is driven down below market, then the market finds a way to monetize some of that, for benefit not of the property owners but for someone else in the value chain – in this case, the resident who can ‘resell’ a supposedly non-transferable occupancy right.

Yet the RSL persists, benefiting those grandfathered individuals who rent at lower rates but hurting the city as a whole.

Mr. Harmon understands the slow expropriation of property, because he has experienced it:

“Put yourself in our position,” Mr. Harmon, a former federal prosecutor, said of himself and his wife, Jeanne. “Suppose somebody told you, you’ve got an extra bedroom, we’d like to put someone in there for as long as they want to stay, and you have to take care of them for the rest of their lives and the rest of your life. That’s really what this is like.”

We’ve got the right plaintiff – the one who can express rent control’s inequity, and who can live it every day. Hallelujah!

The Second Circuit recognized that the Harmons would be entitled to just compensation when their property is subject to a “permanent physical occupation.”

If that is so, then the Harmons are likely to win, because it is self-evident that rental under rent stabilization is as permanent as ownership – in fact, it’s more permanent, because the tenancy is inheritable and hence could last in perpetuity, where ownership could not. [And it requires no financing, either, so you can’t be foreclosed! – Ed.]

In Yee v. City of Escondido (1993), the court insisted that “government regulation of the rental relationship does not constitute a physical taking.” That comes as a real surprise to the Harmons when they hear footsteps each night above their bedroom.

As we saw in Cairo, a long enough rental can become a permanent adverse possession.

Supreme Court decisions dating back to Block v. Hirsh (1921) hold that once a landlord has let a tenant onto the premises for a year, the legislature can extend that lease indefinitely.

And in Mr. Harmon’s case, the protracted occupancy is reaching Methuselah proportions.

[Three of Mr. Harmon’s apartments] are occupied by rent-stabilized tenants inherited from his parents.

There’s proof, if proof were needed, that the tenant has more durable property rights than does the owner. The owner inherits negative-value assets.

The city’s rent regulations have been challenged many times going back decades, making this case an uphill battle. Mr. Harmon has lost twice in lower courts, most recently in September, when the United States Court of Appeals for the Second Circuit, in Manhattan, ruled that the rent-stabilization law did not constitute a taking because (a) it did not stop him from using the building as a rental property and (b) it did not stop him from living there himself.

Both arguments are fig leafs of tissue paper – is Mr. Harmon to be granted the right to live in whatever sliver of the house has not been taken for the people’s uses?

“Courts usually pay scant attention to these well-settled claims and routinely reject them,” said Jarred Kassenoff, a lawyer for landlords and tenants.

Generally they do, which is why the Supreme Court has a wide purview. Otherwise we’d still be living in the demesnes of separate-but-equal.

But Mr. Harmon appears to have caught the attention of the high court, which has asked the city and state to file answers by Jan. 4 to his petition to be heard. [The City got a filing extension – Ed.] The case could have wide repercussions for the almost one million rent-stabilized apartments in the city.

“We are confident that once the U.S. Supreme Court receives our brief, the lower courts’ decision will stand,” said Leonard Koerner, chief of appeals for the city’s Law Department.

They always say that.

Source: Affordable Housing Institute Blog

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